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Are larger condo units a better investment? Comparing profits of 1, 2 and 3-bedroom units

Are larger condo units a better investment? Comparing profits of 1, 2 and 3-bedroom units
PHOTO: Stackedhomes

Some property buyers swear by family-sized units (i.e., three-bedders or bigger), whereas others believe in low quantum one and two-bedders.

But as far as returns go, which of these unit sizes is actually better for investment? It’s worth a look since the property market has changed a lot, from the shoebox craze in the 2010s to the growing preference for larger homes in the past decade:

A broad overview of performance 

For this study, we compared 65 projects and a total of 2,321 transactions. These 65 projects were considered as we had bedroom information readily available. Considering they were launched within the past decade and had sufficient transactions for our analysis, we decided to use this dataset.

The earliest of these transactions was in Martin Modern in 2017, so we're only looking at transactions that occurred within the past five to six years as anything before that would be subject to different environments (cooling measures, etc).

We only looked at transactions that were from new launch to resale, or new launch to sub sale, as the other transaction types (e.g., sub sale to resale, or resale to resale) only made up 10 transactions, which is too low a volume to consider.

Bedrooms Avg. Profit ($) Avg. Profit (per cent) Avg Annualised (per cent) Avg. Holding Period No. of Buy/Sell Tnx
1 $120,787 16.0per cent 3.7per cent 4.1 575
2 $213,483 19.1per cent 4.6per cent 4.0 1,100
3 $367,224 24.3per cent 5.8per cent 3.9 646

This is largely in line with expectations. Larger units tended to see a higher return, with three-bedders having an ROI that’s almost 50 per cent more than one-bedders; and whilst three-bedders have a shorter holding period, it’s not by a significant margin. 

From the opinions of realtors, which we’ve pointed out in many articles, this is due to the majority of condo buyers being HDB upgraders. As upgraders are almost always family units, they don’t have much use for small one and two-bedders.

But are the results the same across different regions?

One of the theories you might hear is that, in the CCR, one-bedders can do much better than in the OCR. This is on the basis that more singles, as well as more investors who want to rent to single expats, are more interested in CCR. 

So to see if there’s any real difference based on region, we took a look at how these unit sizes perform in the CCR, RCR, and OCR:

Bedroom segment Avg. Profit ($) Avg. Profit (per cent) Avg Annualised (per cent) Avg. Holding Period No. of Buy/Sell Tnx
1 CCR $97,624 7.5per cent 2.0per cent 3.4 12
RCR $146,924 16.7per cent 3.9per cent 4.1 158
OCR $111,277 16.0per cent 3.7per cent 4.1 405
2 CCR $166,576 9.8per cent 2.4per cent 4.0 48
RCR $244,253 19.6per cent 4.7per cent 3.9 491
OCR $190,566 19.4per cent 4.6per cent 4.0 561
3 CCR $456,174 17.7per cent 3.7per cent 4.4 42
RCR $409,946 24.5per cent 6.0per cent 3.8 203
OCR $336,281 24.9per cent 6.0per cent 3.9 401

Clearly, the theory doesn't hold up. Notice that all the unit sizes, even the one and two-bedders, actually perform better in the OCR than in the CCR. Besides this, the pattern is consistent with the broad overview: the three bedders still perform best, followed by two-bedders and one-bedders.

As an aside, do note that performance between the OCR and RCR is very close; this may be worth keeping in mind when you come across statements like "shoeboxes in the OCR are the worst." Percentage-wise, the results here suggest they're no better or worse than RCR shoeboxes.

(But that being said, the RCR does have a higher average profit in absolute numbers)

Next, we look at a breakdown based on specific projects:

The same pattern still shows, with three-bedders generally outperforming smaller counterparts in most projects. There is the occasional exception though, such as The Linq @ Beauty World, where two bedders saw a higher ROI (9.3 per cent) versus three-bedders (7.9 per cent); but this irregularity could be an outlier, as there was only a single transaction for each of the one and three-bedder units there. 

The advantage of one or two-bedders may be in rental yields rather than resale

For the above, we have looked only at profits upon resale. We haven't taken into account any additional gains from rental. 

For smaller units, rental yields tend to be higher, because of the lower quantum. (e.g. a $900,000 shoebox unit, rented out at $2,800 per month, would give you a gross rental yield of 3.7 per cent. A $1.8 million three-bedder unit, rented out at $4,500, has a gross yield of about three per cent.) 

After you add rental gains to the equation, it's still possible for a one or two-bedder to ultimately outperform a larger counterpart. However, this is immaterial to an owner-occupier or owner-investor, who has no intention to rent out the unit; so if you fall into such a category, you're better off getting a bigger unit if you can. 

Also, several realtors have expressed that — profits aside — three-bedders or larger units are generally quicker to sell. When it comes to resale, it's a much smaller group of buyers (some retirees, lifelong singles, and other investors) who would consider a one or two-bedder.

The ubiquitous 4-room flat is about 960 to 1,000 sq ft, and this is the size that most Singaporeans consider to be sufficient for a family. This is about the size of a three-bedder, among condos built since the 2010s.

ALSO READ: This homeowner made $3.5m in 6 months: Here are the biggest property flips since 2006

This article was first published in Stackedhomes.

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